Local Bank Financial Constraints and Firm Access to External Finance



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    • Paravisini is at the Columbia Business School. I thank Abhijit Banerjee, Esther Duflo, Sendhil Mullainathan, and Antoinette Schoar for invaluable comments and discussions. I am grateful for comments from the editor, an anonymous referee, Adam Ashcraft, Darrell Duffie, Iván Fernández-Val, Andrew Hertzberg, Kose John, Arvind Krishnamurthy, Owen Lamont, Alexis León, Greg Nini, Jun Pan, Francisco Pérez-González, Tano Santos, Sheridan Titman, and Jeffrey Zwiebel. This work also benefited greatly from the thoughts of all the participants of the finance seminars at Kellogg School of Management, Universitat Pompeu Fabra, Smith School of Business, Sloan School of Management, Stanford Graduate School of Business, Stern School of Business, Stockholm School of Economics, Stockholm University, Tepper School of Business, McCombs School of Business, and Yale School of Management; the banking seminars at the New York Federal Reserve Bank, the Board of Governors of the Federal Reserve Bank and the WFA; and the development economics seminar at the Massachusetts Institute of Technology.


I exploit the exogenous component of a formula-based allocation of government funds across banks in Argentina to test for financial constraints and underinvestment by local banks. Banks are found to expand lending by $0.66 in response to an additional dollar of external financing. Using novel data to measure risk and return on marginal lending, I show that the profitability of lending does not decline and total borrower debt increases during lending expansions, holding investment opportunities constant. Overall, financial shocks to constrained banks are found to have a quick, persistent, and amplified effect on the aggregate supply of credit.